Senator Elizabeth Warren has a new bill out to prevent evictions during the COVID-19 crisis. The bill imposes a 1 year moratorium on evictions nationwide. That’s it. On its face, the bill seems to have two deficiencies. First, millions of low-income tenants will be unable to repay their past due rent. To give them a fresh start we will probably need a streamlined process for consumer bankruptcy filings. Second, a rent moratorium may trigger a financial crisis, as landlords default on their mortgage payments. To prevent this, an eviction moratorium will need to be accompanied by a bank bailout if banks end up having their capital depleted by mortgage defaults. Although bank bailouts are unpopular, an eviction moratorium coupled with bankruptcy reform
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Senator Elizabeth Warren has a new bill out to prevent evictions during the COVID-19 crisis. The bill imposes a 1 year moratorium on evictions nationwide. That’s it.
On its face, the bill seems to have two deficiencies. First, millions of low-income tenants will be unable to repay their past due rent. To give them a fresh start we will probably need a streamlined process for consumer bankruptcy filings. Second, a rent moratorium may trigger a financial crisis, as landlords default on their mortgage payments. To prevent this, an eviction moratorium will need to be accompanied by a bank bailout if banks end up having their capital depleted by mortgage defaults. Although bank bailouts are unpopular, an eviction moratorium coupled with bankruptcy reform and a bank bailout will potentially be much cheaper for taxpayers than giving insolvent tenants money to pay their landlords in full, because it pushes losses due to tenant insolvencies from taxpayers to landlords and banks.
In a rational world, these predictable problems would be addressed in Warren’s bill. But we do not live in a rational world, and an eviction moratorium is much easier to sell politically than a bankruptcy overhaul and a bank bailout. (We know this is true, because a 120 day limit on evictions included for federally financed properties was included in the CARES act, Democrats have made numerous proposals for a more comprehensive approach, and many states and localities have put a temporary freeze on evictions.) And – this is the critical part – Congress will deal with the bankruptcy problem and bank bailout if they lead to crises in the future. There is certainly some risk here, especially if a bank bailout is handled poorly, but the benefits to struggling tenants (avoiding homelessness) and savings to taxpayers could easily be worth the risk. Warren knows what she is doing.
The general approach of shifting losses caused by the COVID economic collapse from renters and taxpayers to landlords and banks would also be valuable for small businesses, who (if I understand this correctly) cannot avoid past rent obligations in bankruptcy reorganizations. An eviction moratorium – especially if coupled with bankruptcy reform – might do more to help small businesses survive than the Paycheck Protection Program, which did not adequately address non-wage costs and probably channeled hundreds of billions of dollars to businesses that did not need support.